FTC and DOJ Release Report on IPR and Antitrust
April 17, 2007. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) released a report [217 pages in PDF] titled "Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition". See also, FTC release.
The report begins with the statement that "intellectual property laws and antitrust laws share the same fundamental goals of enhancing consumer welfare and promoting innovation". It rejects as outdated and incorrect the argument that intellectual property law's grant of exclusivity creates monopolies that are in tension with antitrust law's attack on monopoly power.
"Intellectual property laws create exclusive rights that provide incentives for innovation", the report states. "These property rights promote innovation by allowing intellectual property owners to prevent others from appropriating much of the value derived from their inventions or original expressions. These rights also can facilitate the commercialization of these inventions or expressions and encourage public disclosure, thereby enabling others to learn from the protected property."
It adds that "Antitrust laws foster competition by prohibiting anticompetitive mergers, collusion, and exclusionary uses of monopoly power. Yet, it is well understood that exercise of monopoly power, including the charging of monopoly prices, through the exercise of a lawfully gained monopoly position will not run afoul of the antitrust laws. The same principle applies to monopoly power that is based on intellectual property rights."
And hence, "antitrust doctrine does not presume the existence of market power from the mere presence of an intellectual property right."
The bulk of the report then address some of the more difficult issues that arise when antitrust law is applied in the context of intellectual property.
Strategic Use of Licensing and Unilateral Refusals to License Patents. The report first addresses unilateral refusals to license patents and the divergent opinions in Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), and In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000).
The report offers four conclusions.
First, it concludes that "Section 271(d)(4) of the Patent Act does not create antitrust immunity for unilateral refusals to license patents."
Second, it concludes that "Statements in Supreme Court jurisprudence support the traditional understanding that the unilateral right to refuse to grant a patent license is a core part of the patent grant."
Third, it concludes that "Antitrust liability for mere unilateral, unconditional refusals to license patents will not play a meaningful part in the interface between patent rights and antitrust protections. Antitrust liability for refusals to license competitors would compel firms to reach out and affirmatively assist their rivals, a result that is ``in some tension with the underlying purpose of antitrust law.´´ Moreover, liability would restrict the patent holder’s ability to exercise a core part of the patent -- the right to exclude."
Finally, the report concludes that "Conditional refusals to license that cause competitive harm are subject to antitrust liability."
Industry Standards and Intellectual Property. The report states that "Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice".
Moreover, the report states that "Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate."
However, the work of standard setting organizations (SSO) can raise antitrust concerns. The two agencies' report makes six conclusions.
First, it concludes that "Ex ante consideration of licensing terms by SSO participants can be procompetitive."
Second, it concludes that "Joint ex ante consideration of licensing terms by SSO participants is unlikely to constitute a per se antitrust violation. The Agencies will usually apply the rule of reason when evaluating joint activities that mitigate hold up by allowing potential licensees of the standard to negotiate licensing terms with IP holders. Such ex ante negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for a patent holder."
Third, it concludes that "An intellectual property owner’s unilateral announcement of licensing terms does not violate section 1 of the Sherman Act."
Fourth, it concludes that "An intellectual property owner's unilateral announcement of price terms, without more, does not violate section 2 of the Sherman Act."
Fifth, it concludes that "Bilateral ex ante negotiations about licensing terms that take place between an individual SSO member and an individual intellectual property holder outside the auspices of the SSO are unlikely (without more) to require any special antitrust scrutiny because intellectual property rights holders are merely negotiating individual terms with individual buyers." (Parentheses in original.)
Finally, the report concludes that "The Agencies take no position as to whether SSOs should engage in joint ex ante discussion of licensing terms."
Portfolio Cross-Licensing Agreements and Patent Pools. The report notes that "patent rights necessary to commercialize a product are frequently controlled by multiple rights holders".
It continues that "Portfolio cross licenses and patent pools can help solve the problems created by these overlapping patent rights, or patent thickets, by removing the need for patent-by-patent licensing, thus reducing transaction costs for licensees. In addition, patent-pooling agreements may mitigate royalty stacking and hold-up problems that can occur when multiple patent holders individually demand royalties from a licensee."
However, it also states that cross-licensing and patent-pooling agreements "may generate anticompetitive effects if the arrangements result in price fixing, coordinated output restrictions among competitors, or foreclosure of innovation."
The report offers four conclusions.
First, it concludes that "The Agencies will continue to evaluate the competitive effects of cross licenses and patent pools under the framework of the Antitrust-IP Guidelines. Given the cognizable benefits and potential anticompetitive effects associated with both of these licensing practices, the Agencies typically will analyze both types of agreements under the rule of reason."
Second, it concludes that "Combining complementary patents within a pool is generally procompetitive. Including substitute patents in a pool does not make the pool presumptively anticompetitive; competitive effects will be ascertained on a case-by-case basis."
Third, it concludes that "The competitive significance of a pool’s licensing terms will be analyzed on a case-by-case basis considering both their procompetitive benefits and anticompetitive effects."
Finally, the report concludes that "The Agencies will not generally assess the reasonableness of royalties set by a pool. The focus of the Agencies’ analysis is on the pool’s formation and whether its structure would likely enable pool participants to impair competition."
Variations on Intellectual Property Licensing Practices. The report concludes that "The Agencies will continue to apply the flexible rule of reason analysis of the Antitrust-IP Guidelines to assess intellectual property licensing agreements, including non-assertion clauses, grantbacks, and reach-through royalty agreements."
Tying and Bundling of Intellectual Property Rights. The report states that "Economic theory can identify both procompetitive and anticompetitive effects when two or more products are tied or bundled together and at least one of these products involves intellectual property rights."
However, it adds that in spite of this, "tying arrangements, including those involving intellectual property, continue to be per se illegal if the seller has market power in the tying product and certain other conditions are met. However, the application of the per se rule to tying has evolved to incorporate a market analysis." (Footnote omitted.)
The report concludes that "The Antitrust-IP Guidelines will continue to guide the Agencies’ analysis of intellectual property tying and bundling. Pursuant to the Antitrust-IP Guidelines, the Agencies consider both the anticompetitive effects and the efficiencies attributable to a tie, and would be likely to challenge a tying arrangement if: ``(1) the seller has market power in the tying product, (2) the arrangement has an adverse effect on competition in the relevant market for the tied product, and (3) efficiency justifications for the arrangement d o no t o u t w e i g h t h e anticompetitive effects.´´ If a package license constitutes tying, the Agencies will evaluate it pursuant to the same principles they use to analyze other tying arrangements." (Footnotes omitted.)
Practices that Extend Beyond a Patent's Term. Lastly, the report addresses extending "extend the reach of a patent beyond the expiration of a patent's statutory term, such as collecting royalties beyond the statutory term, the use of exclusive contracts that deprive rivals or potential entrants of a source of supply or access to customers, or bundling trade secrets with patents."
See especially, Brulotte v. Thys Co., 379 U.S. 29 (1964). The report offers three conclusions.
First, it concludes that "The starting point for evaluating practices that extend beyond a patent’s expiration is analyzing whether the patent in question confers market power."
Second, it concludes that "Standard antitrust analysis applies to practices that have the potential to extend the market power conferred by a patent beyond its expiration."
Finally, it concludes that "Collecting royalties beyond a patent’s statutory
term can be efficient. Although there are limitations on a patent owner's
ability to collect royalties beyond a patent’s statutory term, that practice may
permit licensees to pay lower royalty rates over a longer period of time, which
reduces the deadweight loss associated with a patent monopoly and allows the
patent holder to recover the full value of the patent, thereby preserving
innovation incentives." (Footnote omitted.)